Definition: The modified accelerated cost recovery system, often abbreviated as MACRS, is a depreciation system created by the IRS that recognized more depreciation expense in early years and less expense in later years. MACRS is required for US federal taxation purposes unless other approved systems are appropriate.
What Does MACRS Mean?
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MACRS is similar to the GAAP double declining method in depreciation expenses are frontloaded on the beginning years with less cost being recognized in the later years of the asset’s useful life. This makes sense because assets are generally more useful when they are brand new. Take a computer with a five-year useful life for example. The first two years the computer will be much more productive than he last two years. As the computer begins to age, newer software that requires more speed will slowly bring down the performance of the machine until it is completely unusable.
Example
MACRS depreciation is calculated using tables that the IRS created for each asset class. Since there are multiple classes of assets with different length useful lives, the IRS has developed a few different tables ranging from 3 to 39 years. The interesting thing about MACRS is that the depreciation expense is actually recognized for one year longer than the asset life. For instance, a 3-year asset is depreciated over 4 years. Here is an example of a few different MACRS depreciation schedules:
| Year | 3-Yr | 5-Yr | 7-Yr | 10-Yr | 15-Yr | 20-Yr |
| 1 | 33.33 | 20.00 | 14.29 | 10.00 | 5.00 | 3.75 |
| 2 | 44.45 | 32.00 | 24.49 | 18.00 | 9.50 | 7.219 |
| 3 | 14.81 | 19.20 | 17.49 | 14.40 | 8.55 | 6.677 |
| 4 | 7.41 | 11.52 | 12.49 | 11.52 | 7.70 | 6.177 |
| 5 | 11.52 | 8.93 | 9.22 | 6.93 | 5.713 | |
| 6 | 5.76 | 8.92 | 7.37 | 6.23 | 5.285 | |
| 7 | 8.93 | 6.55 | 5.90 | 4.888 | ||
| 8 | 4.46 | 6.55 | 5.90 | 4.522 | ||
| 9 | 6.56 | 5.91 | 4.462 | |||
| 10 | 6.55 | 5.90 | 4.461 | |||
| 11 | 3.28 | 5.91 | 4.462 | |||
| 12 | 5.90 | 4.461 | ||||
| 13 | 5.91 | 4.462 | ||||
| 14 | 5.90 | 4.461 | ||||
| 15 | 5.91 | 4.462 | ||||
| 16 | 2.95 | 4.461 | ||||
| 17 | 4.462 | |||||
| 18 | 4.461 | |||||
| 19 | 4.462 | |||||
| 20 | 4.461 | |||||
| 21 | 2.231 |
As you can see, more expenses are recognized in the beginning years than in the ending years. This is consistent with GAAP bases methods, but is not used for GAAP. The modified accelerated cost recovery system is only used for federal and state income tax purposes. GAAP and IFRS have their own ways to calculate and allocate asset costs over time.
